Fat 'n Happy the Rooster Trader Vic the Trading Rooster

Just Another Jim

Commodities Trading



Trading Strategies:

Intra-day vs End-of-Day Trading

I discovered, quite by accident, something that I already knew: I am not a day trader; or at least, I shouldn't be.

Because of the inherent limitations of paper trading I decided to test my new trading system using a strictly end-of-day trading strategy. I develop my daily trading plan either the evening before or early morning before the markets open. I then place my trades using stop and limit orders. After a week of doing this religiously I have discovered something I knew all along but have conveniently ignored over the last several months. I don't have enough data nor a robust enough trading system to do intra-day trading. I believe that in order to be successful I will need to consistently follow an end-of-day strategy.

Using an end-of-day system I concern myself with the following data:

Even though there are only three items on this list, these four items give me enough data to sometimes be overwhelmed with information. There are other things that I am aware of that are not primary to this trading system but still catch my attention, such as support and resistance lines, channels and channel breakouts, reversal dates, etc. The biggest task in making trading decisions is not figuring out what the charts are telling me, but systematically ignoring extraneous data because I have knowledge of so many different tricks, signals, and indicators.

That's the major reason I'm testing this new trading system after all. After a year of actively trading commodities my "system," which I've added to here and there, has devolved into a mish-mash of signals with no single, unifying strategy. I've learned too many tricks. My biggest task is seeing, and then ignoring, all of this extraneous data that I've learned about.

At the end of the day (or at least before the markets open) I have to set up a bunch of "what if" scenarios: What if wheat breaks above $3.75 a bushel? Well, I want to buy because the price of wheat is breaking above a key Fibonacci resistance. So I place a limit order a few cents higher. That way, if the price breaks above $3.75, I will automatically be in the market.

What happens if I add one more variable into the mix? The specific variable I am talking about is intra-day trading? Suddenly a whole new level of information is thrown at me. There is more information there than I am able to assimilate very easily.

Let's return to the proposed wheat trade? Last night I decided that I wanted to go long if the price broke above $3.75. The following morning wheat moves all the way to $3.80 in the first ten minutes of trading but then drops back down to the $3.70 level. What do I do? Suddenly I'm not sure because my system didn't specifically spell this possibility out. What if the market gaps first thing in the morning, opening at $3.88 ($0.13) above my entry target and continues higher from there? What do I do now? Will the price come back down a bit so that I can get in closer to my target price? What do I do? Suddenly I'm not sure because my system didn't specifically spell this possibility out.

In both of these scenarios I had a specific plan of action: I was going to enter the market at $3.75, but before I actually got the trade done unexpected things happened–things that I hadn't specifically planned for (things that fall outside of my decision making parameters of open, high, low and close). When those unexpected things happen I begin to ask myself, "What should I do?" Because the things that are happening are not part of my end of day planning I am left with no answer to the question. The only thing I can at that point is make a decision based on my emotions. That's not trading; that's gambling.

The same pitfalls tend to occur even if nothing out of the ordinary happens during the next trading day. Let's return to my end of day analysis. I decide that I like the look of wheat and I want to buy it if it moves above $3.75, but instead of placing an order, I decided to wait until tomorrow. "I'll see what tomorrow looks like and then place my trade."

What will I see tomorrow that I didn't see with the end-of-day data? Nothing that should effect my trading decision, but a lot of extraneous signals and noise that I have been trying to filter out of my trading strategy. My system has already given me my signal; all other information at this point is noise.

If it's not noise, if there is some vital piece of information that I need before making that trade, then there is a fundamental flaw in my system. But I have carefully analyzed and developed my system so I am confident that there is no fundamental flaw. It is true that I will have more losing trades than winning trades, but it is also true that overall I can expect to make $123 on an average trade. That is my trading system.

Waiting to see what happens tomorrow morning has nothing to do with my trading system. Therefore, waiting to see what happens is not trading, it is gambling. And when you gamble the odds are always with the house.

There are many intra-day trading systems out there. I suspect that many of those systems would make more money over the long run than my end-of-day system. But those intra-day systems strip me of my freedom and chain me to hours of staring at the computer screen every day waiting for intra-day set-ups and signals.. That's not why I got into trading. Since my system uses end-of-day data, I would be a fool to "wait and see what happens tomorrow."